the best way to predict the future is to create it.

Without Barley, There is No Beer

“You can only make a good thing out of good products; therefore, stick to the motto that the best ingredient is not too good for our beer.”

– Adolphus Busch, 06-11-1901.

Precisely one century later, Anheuser-Busch InBev is transforming global agriculture.

The primary raw ingredient in the 190 M kiloliters/yr of beer consumed around the globe is malted barley.

For Anheuser-Busch InBev’s Procurement Team, this means five million metric tons of barley per annum.

MALTING BARLEY:

In contrast to feed barley, often used as food for animals, malted barley is comprised of a unique combination of starch, enzymes, flavors and aromas – a combination that has been deemed quintessential for brewing and distilling the beer we know and love.

But it’s not simple.

Malting barley is a vulnerable biological process, typically consisting of three phases: 1.) steeping barley grains through air and water for germination, 2.) sprouting the grains in a controlled environment, and 3.) kilning, or heating, the barley grains in order to reduce moisture and store the barley. The quality of the barley is of utmost importance to the end result: beer that consumers desire.

To meet the quality specifications for barley, growers must use just the right amount of fertilizer to maximize yield, while simultaneously ensuring protein levels remain within allowable limits. If a farmer fails to do so, the barley will not get the nutrition it needs during the fermenting process. As you might expect, the level of protein in the barley substantially affects the taste of the beer.

And, thus, malting barley is both an art and a science.

Consequently, malted barley commands a 30% price premium over feed barley, but malted barley is also considerably riskier for farmers.

Unlike other crop commodities, e.g. wheat, soybeans, and corn, there is no direct futures market for barley. If a farmer is unable to meet quality standards, the futile malted barley can be sold in the commodity feed markets, but the farmer is essentially limiting his/her losses, as extensive effort has already been put forth in the failed attempt to malt.

ENTER THE CLIMATE CRISIS:

Barley supply is declining while demand is increasing.

“Long story short, the unimaginable has happened: we’re heading into a beer crisis.”-savetheales.au.com.

Given the complexity in production, malted barley is often sold through a direct contract between grower and buyer, in order to ensure the barley meets each buyer’s specific criteria.

Evergrain International AG has predicted barley production will decrease from 144.8 million metric tons (MMT) to 138.6 MMT in 2016. This decline in production results in a disequilibrium with the conflicting prediction of an increase in demand of 13% for malt barley between 2015 – 2020.

Erratic weather events are depleting barley crops, destroying barley production, and urging farmers to consider simpler, more predictable crops to harvest. Hot extremes have become more frequent and more intense, rainfall has augmented, and, in-between the periodic, heavier rainfalls, droughts have ensued.

Excessive rain is increasing disease and diminishing quality, causing much of the harvest to become unsuitable for malting. Premature frost is reducing both yield and quality of barley as the frost interrupts the grain filling. Difficulty of access to water has become a growing concern, as are impending droughts.

This is the cost of carbon.

And it’s affecting our beer.

At the end of 2014, Kirin Company, Limited reportedthe first decrease in beer production in 30 years. Three decades. EOY global production of 191 million kiloliters represented a 0.5% YoY decline in production.

As climate change continues to eradicate the harvest, buyers are increasingly forced to purchase replacement barley at a price higher than contracted.

This harsh reality is that climate change is coercing brewers to either a.) produce beer of lesser quality, or b.) invest resources in order to successfully grow barley despite harsher weather patterns.

Executing on the company vision, to be the “best beer company bringing people together for a better world”, SmartBarley was implemented to transform agriculture and protect AB InBev’s much needed barley supply.

In 2013, AB InBev established an online platform for its farmers. The program began with 341 barley growers in seven countries. Today collaborating with over 20,000 global growers, SmartBarley allows growers to benchmark and share best practices, increasing productivity and natural resource efficiency across farms world-wide.

SmartBarley is a robust technical resource for malt barley growers.

As proclaimed on the website: “One of AB InBev’s Global Environmental Goals is to improve water management and reduce water risks in 100 percent of our key barley growing regions by the end of 2017 in partnership with local stakeholders. SmartBarley is playing an important role in helping us achieve this goal by identifying opportunities to improve water management and reduce water risks, driving the exchange of improved practices related to water use efficiency and water productivity, and measure the efficacy of soil and irrigation management pilot initiatives.”

HOW DOES IT WORK?

The SmartBarley process begins with a face-to-face conversation with voluntary farmer participants and then aggregates data from surveys.

The data represents all critical inputs and outputs of the process, including, but not exclusive to: chemical applications, nitrogen rates, seeding rates, production yields, soil health, and best farming practices. The data is then aggregated into key performance indicators, such as seeding rates, fertilize rates, and water efficiency. And, thus, benchmarks are established.

The SmartBarley platform allows growers to anonymously benchmark against others.

The objective? To allow both farmers and Ab InBev to identify and execute on areas of improvement, to establish quantified metrics, and to share best practices and related technologies for the production of barley. Everyone stands to gain.

The SmartBarley Portfolio:

The SmartBarley project portfolio was designed to help different regions utilize best practices in order to close major gaps. Each program in the portfolio has an individual owner behind it, responsible for setting specific performance targets.

As of 2015, the portfolio contained 17 field projects, each focused on various technologies designed to enhance production methods. Every project follows the same process: development, pilot, scale. A key tenet of SmartBarley’s success seemingly stems from that notion that agronomists shape the direction of the programs.

Enter Big Data:

Recognizing the massive insights big data analytics offers, AB InBev established a partnership in 2014 with the University of Illinois Champaign-Urbana. Through research conducted at what the company calls the “Bud Lab”, AB InBev can opportunistically connect SmartBarley data with global climate, soil, and topography data. In doing so, the company is able to more accurately define best practices, benchmarks, and key characteristics that contribute to supreme yield and quality.

REST OF THE WORLD: DUMB BARLEY?

“We are in a unique spot as a company because we have direct contact with our contract growers.” – Angie Slaughter, Senior Manager Raw Material and Energy Procurement, Anheuser-Busch InBev.

Anheuser-Busch InBev has achieved massive strides in innovating to mitigate the plights of climate change.

At the national level, countries too are taking action.

“Facing the possibility climate change could significantly increase the price of beer, a Queensland researcher is on mission to drought-proof the amber fluid. And he thinks he has found the solution.” – brisbanetimes.

The Journal of Cereal Science published a barley study undertaken last year by researcher and scientist Peter Gous, in which Gous and his team of scientists examined how climate change is affecting the production of barley: primarily, how more frequent and more severe droughts will impact the quality of starches inside barley grains.

The scientists found that the starches inside barley grains grown with too little water are different than those inside appropriately-watered barley.

Consequently, “if it (water stress) pushes normal starch in the grain to the point that it becomes resistant starch, the cost of producing your XXXX is going to increase.”

As the cost of inputs rise, consumers might very well be coerced to pay above-the-norm prices for the same quality and quantity of beer.

Gous’ pilot study examined how the existence of a “stay-green” group of genes in the starch could help mitigate water stresses. “We’ve looked at this and gone, ‘OK, we can drought-proof our crops and the plants stay green, but do we still have the same quality grain?'”

As told by Gous, sorghum originally consisted of a pure “stay-green” group of traits. However, natural selection over the years has reduced the abundance of “stay-green” traits in crops, replaced by “quality traits”. Interestingly, what has been considered vital for human consumption is not necessarily identical to that which has been considered vital for long-term plant survival.

As growers increasingly focus on maximizing yields, they have been breeding away from optimum survival.

Gous has reintroduced these quintessential, drought-resistant traits originally discovered in sorghum in order to “help grain quality stay stable even in a more drought prone world.”

THE TAKE-AWAY:

While climate change is causing catastrophe around the world, it lends business massive opportunity.

Anheuser-Busch InBev, among others, is acclimating to extreme weather events opportunistically in order to maintain quality despite climate change. This is a massive competitive advantage as our world becomes one with increasingly finite resources.

First-movers who can innovate to offset the effects of carbon stand to gain.

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2 thoughts on “Without Barley, There is No Beer”

Very interesting post! The business model and ROE for this entire industry is very impressive and clearly demonstrates tremendous brand koyalty, which allows superior returns. The competitive advantage presented by a positive response to global warming – I had not really thought of. – and is one more investment rationale for Anheuser Busch